Buy Stocks, Bash Bonds

OZM: Leading The Pack

Och-Ziff Capital Management (OZM), one of the few publicly traded hedge funds on the market, crushed December with their Master Fund gaining 1.0% month-over-month, ending 2012 up 11.18%. Their European Master Fund and Asia Master Fund were up 8.62% and 7.07% for 2012, respectively. Compared with the benchmark HFRX Global Hedge Fund Index 2012 return of 3.17%, OZM had a killer year.

Though fund flows (money going into the fund) were negative for December by ~$450 million, they were positive for the year at $300 million. We expect more inflows into Och-Ziff in 2013 based on last year’s strong performance numbers.

The stock is one of our top long ideas in financials for 2013. We believe that the market has yet to recognize the value of OZM’s incentive fee business and now that the fiscal cliff is behind us, we see that there is no damaging regulation that will affect asset management firms save for the small bump in long-term capital gains rates. It’s also worth noting that alternative asset managers like hedge funds do well in times of quantitative easing and we are well into our third round of QE.

SIZING UP ASIA & LATIN AMERICA FOR 2013

Takeaway:By modeling each economy from a full-year G/I/P perspective, we are better able to contextualize country-specific risks and opportunities.

SUMMARY BULLETS:

To kick-start the new year, we invite you deep into our process as we model each of the economies we follow across Asia and Latin America from a comprehensive GROWTH/INFLATION/POLICY perspective.

From there, we compare the mid-points of our 2013 forecast ranges for both GROWTH and INFLATION with current Bloomberg consensus forecasts, calling out any meaningful deviations between the our numbers and the Street. In short, we currently hold a variant outlook versus the Street in the following countries:

China: INFLATION

Hong Kong: INFLATION

Indonesia: INFLATION

Japan: GROWTH and INFLATION

New Zealand: GROWTH and INFLATION

Philippines: GROWTH

Singapore: GROWTH

Taiwan: GROWTH

Thailand: GROWTH

Brazil: GROWTH

Chile: GROWTH and INFLATION

Colombia: INFLATION

Mexico: INFLATION

Peru: GROWTH

Venezuela: GROWTH and INFLATION

Lastly, we provide color on each country’s financial market performance in 2012, as well as update you on our active fundamental investment ideas for each country. If we do not currently hold a high-conviction thesis, we flag any country-specific asset classes that are currently screening as a LONG or SHORT idea at first glance.

To dialogue further on anything you see below or to drill into country-specific catalysts, etc., please email us at .

METHODOLOGY

As a reminder, all of our country-specific estimates are being driven by our proprietary predictive tracking algorithm – a clear differentiator from traditional sell-side econometric models that tend to be, at best, late at flagging critical deltas in economic fundamentals.

The main drawback to our approach is that because of the model’s heavy reliance on recently-reported trends in the underlying data series, the forecasting error tends to widen dramatically as estimates track further and further away from the latest reported data point. That being said, we are purposefully sacrificing long-term accuracy for near-term precision, as most long-term predictions tend to be wildly inaccurate anyway.

It's also important to note that the output(s) of our predictive tracking algorithm is a band of probable outcomes, rather than a singular forecast. We take the median of these ranges to artificially produce comparable full-year estimates to the pin-the-tail-on-the-donkey-style estimates of the Old Wall.

Lastly, our forecasts are inherently fluid in nature and are likely to adjust throughout the course of the year as incremental data is reported – particularly in the event(s) of forecast variance. For now, we offer up what the model is currently signaling to us for each country.

Active Fundamental Investment Ideas: We have held a bearish bias on the Aussie dollar (TAIL) and the Aussie equity market (TAIL) since JUN 5, 2012. While our timing has been off here, we continue to view the Australian economy as among the next shoes to drop amid the popping of Bubble #3 (commodities) and China’s economic rebalancing agenda.

Key Callout for 2013: Our outlook for GROWTH in the Philippines is currently well above consensus at the present juncture.

Active Fundamental Investment Ideas: N/A; while Filipino stock market remains a long-term TAIL favorite of ours as a result of its prudent POLICY and robust GROWTH outlook, we are strategically on the sidelines for now.

Active Fundamental Investment Ideas: We have held a bearish bias on the Argentine peso (TAIL) and the Argentine equity market (TAIL) since NOV 4, 2010. While we continue to view the Argentine economy as a clear loser amid the popping of Bubble #3 (commodities) and China’s economic rebalancing agenda, we are increasingly inclined to strategically suspend our bearish bias on Argentina’s equity market in the near term, as a 2013 currency devaluation may spur Venezuelan-like stock market gains.

Key Callout for 2013: Our outlook for GROWTH in Venezuela is well shy of consensus at the present juncture. Our outlook for INFLATION in Venezuela is well above consensus at the present juncture.

Active Fundamental Investment Ideas: N/A, though we continue to see heightened risk of a material devaluation of the Venezuelan bolivar over the intermediate term.

Darius Dale

Senior Analyst

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Bullish: SP500 Levels, Refreshed

Takeaway:After yesterday’s monster move, for this market to be flat on the day is saying something.

POSITIONS: 11 LONGS, 7 SHORTS

After yesterday’s monster move, for this market to be flat on the day is saying something.

It either means tomorrow’s jobs print is going to surprise on the upside, or people are about to get run over again on the long side – either way, we’ll have a big move!

I respect the signals above the noise – and both our research and risk management signals are telling me that there’s an increasing probability that headline employment trends continue to improve.

Yes, that would be bad for bonds; bad for gold, relative to stocks (2 of my 7 SHORTS are GLD and GDX).

Across our core risk management durations, here are the lines that matter to me most:

Immediate-term TRADE resistance = 1474

Immediate-term TRADE support = 1449

Intermediate-term TREND support = 1419

In other words, the SP500 is in a Bullish Formation (bullish TRADE, TREND, and TAIL), and the research signal on #GrowthStabilizing confirms that risk management signal.

KM

Keith R. McCullough Chief Executive Officer

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01/03/13 11:09 AM EST

SSS Focus on Margins, Not Sales

Takeaway:A strong final week wasn’t enough to save the month as retailers had already turned to aggressive markdowns.

A strong final week wasn’t enough to save the month as the dwindling number of retailers that are still reporting sales results had already turned to aggressive markdowns elevating Q4 margin related earnings risk.

December Retail Sales coming in better than expected with 12 companies beating expectations compared to 6 misses was little consolation in light of recently lowered numbers. With tough January comps ahead, one of the key factors to year-end performance and start to 2013 will be inventory induced margin risk. On the whole, the industry was fairly lean headed into the holidays, but in the absence of early holiday demand that mattered little into month’s end as retailers accelerated markdown activity.

In the chart below, note how there was only one week in the final five weeks of the year where sales growth bested prior year levels. This chart is important because it is the ICSC index, which is a weighted index of 80 (non-food and non-auto) retailers across sub-categories that dwarfs the 18 that currently report same store sales numbers publicly. Note that starting in February, that sample will be down to 15. Our sense is that it will be closer to zero in a year, and we’ll close the chapter of information flow that has always been same store sales day.

ICSC Same Store Sales Index

Back to the call-outs...

For the second consecutive quarter, KSS takes home the prize for negative callout of the day. This hardly comes as a surprise with KSS the most over-inventoried department store retailer headed into the holidays (see charts below). As a result, KSS confirmed they turned to deeper than planned discounts in order to clear the decks headed into fiscal 2013 taking down 4Q estimates by more than 20% in the process. Retailers with more favorable sales/inventory levels (i.e. at less risk) include TJX, ROST, and TGT.

The biggest positive callouts were COST and JWN both of which came in nearly 2x expectations of ~4.5% comps. While more impressive for COST given its sheer size, the strength of JWN at the high-end is perhaps most notable given recent concerns regarding luxury retail. This is a positive read-through for handbag related names (FNP, KORS, COH) with the category highlighted as running above comp average.

Other Callouts:

Off-price strength with ROST and TJX only retailers to raise numbers into year-end. It’s little coincidence that both companies sport superior sales/inventory levels relative to peers.

GPS (+5% vs +3.9%E) Old Navy coming in VERY strong in December rebounding from three consecutive months of slowing growth – offset in part by deceleration in all other segments.

Lap JCP induced comp reacceleration starting February.

Back to the well approving $1Bn share Repo plan (replacing prior $1Bn plan)

M (+4.1% vs +4.1%E) in-line with online up +52%

Announced closing 6 stores to account for $2-$4mm in related costs (plan to open 9 in 2013)

Please CLICK HERE to access the materials for this call and dial in 5-10 minutes prior to the 1:00pm EST start time using the number provided below. If you have any further questions email .

Toll Free Number:

Direct Dial Number:

Conference Code: 939528#

The Hedgeye Healthcare Team, led by Tom Tobin, will be hosting an expert conference call today, at 1:00pm EST featuring industry expert Ken Burdick, former Senior Executive of United HealthGroup and Chief Executive Officer and President of Blue Cross Blue Shield of Minnesota.

The call will analyze the impact of the Affordable Care Act across the healthcare industry, addressing the opportunities and risks associated with the implementation of the Patient Protection and Affordable Care Act. Ken Burdick has more than 25 years of experience in managed healthcare and his insight to the implementation of this act will be extremely insightful and constructive in managing risk across the managed care names.

KEY TOPICS WILL INCLUDE:

Will employers drop coverage? Penalties? Taxes?

Insurers versus exchanges

Consolidation among providers and payers

ABOUT KEN BURDICK:

Served as SVP of Medicaid Business at Coventry Health Care Inc. and managed its Medicaid and Behavioral Health (MHNet) businesses

Served as President and CEO of Blue Cross and Blue Shield of Minnesota

October 1995 to May 2009 employed by UnitedHealth Group

May 2008 to May 2009, served as the CEO of Secure Horizons, a Medicare business

November 2006 to May 2008, served as the CEO of United Healthcare's Commercial Business

April 2004 to November 2006, served as CEO of United Healthcare's Southwest Region and President of United Healthcare Public Sector

January 2000 to April 2004, served as the CEO of United Healthcare of Arizona

Prior to 2000, served as the head of the national underwriting organization for all lines of business and the general manager of the central Texas operation

Served as the CEO and President of United HealthCare Services, Inc.

Director of United Biologics, LLC since October 2012

Serves as a Director of A.T. Still University of Health Sciences

Serves on the Board of Directors for Preferred Homecare and PASR, a non-profit Board advancing school readiness throughout Minnesota

Earned his bachelor's degree from Amherst College and a law degree from University of Connecticut School of Law

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